Although the stock slumped nearly 25 percent in its first year, it has rebounded by roughly two thirds and traded at 2.51 Singapore dollars ($2.03) late last month. Schwartz recently discussed the outlook for the company with Institutional Investor International Editor Tom Buerkle.Institutional Investor:Didnt anyone tell you that China is having a hard landing?Schwartz: Its hard to describe it as a hard landing when GDP growth is still north of 7 percent. Our business is almost entirely focused today on domestic consumption. Eighty-one percent of our existing business serves domestic consumption; 100 percent of the new space were building serves domestic consumption. Retail sales growth for the first eight months of the year was 14.1 percent. Thats not the 18 percent rate of four years ago, but 14 percent on 2011 numbers is more absolute growth than 18 percent in 2008. Where are you expanding over the next three to five years? On an absolute basis, our greatest growth will still be in the big coastal markets: Shanghai, Beijing, Tianjin, Hangzhou, Shenzhen. That will continue to be the bulk of our business. On a percentage basis, it will be in the interior: the Chongqings, the Chengdus, the Wuhans. In a country where they have 20 cities with populations in excess of 10 million people, theres a lot of opportunity. Do you risk saturation in any particular markets?Not even close. Today, China has one fourteenth the amount of distribution space per capita that the U.S. has. Now, one can make the argument that the U.S. is too driven by domestic consumption, that 69 percent of GDP driven by domestic consumption is not the right place to be, but clearly China at 31 percent is not the right number. You need a lot more space than exists today to serve a rising middle class. When somebody becomes a middle-class consumer, the amount of goods they consume are pretty much the same no matter where they are in the income range. They eat the same quantity of food. If you buy a car, parts for a Hyundai dont take any less space than parts for a Bentley. Can you sustain the current rate of growth of square footage for the next three to five years?I think we can. Assuming that China continues to grow north of 6 percent per annum, I dont see an issue given the dramatic shortage of space that we find in China today. Actually, our pipeline of identified customer demand is in excess of 4.5 million square meters, yet weve talked about a projected development start level [this financial year] of 2 million square meters. The real constraint is not demand. The real constraint is how fast we can scale the organization. How fast can you train people, recruit people, put together the organization to grow? And we think we can grow our development starts circa 20 percent per annum for at least the next three to four years. What are you doing to overcome those capacity constraints?Thats a great question. We run our company like a real company, not like a real estate company. Most real estate companies talk about deals. We dont talk about deals. We talk about scaling a business. And my partner, Ming, has put in place management development programs where we identify our top 20 young talents under 40 years old. Each one of them gets a mentor. Ming has three mentees. Heather Xie, our CFO, has three mentees. All our senior management has mentees in China. And it really develops people. It gives them a sense of family. These are things that real companies do, that GE does, and typically real estate companies dont think that way. Whats changed in terms of the operating environment in China in your 20-odd years of experience? The biggest change weve seen is the rapid increase in sophistication of Chinese companies. Its amazing how fast theyve created great companies companies like Haier, companies like Lenovo, companies like Chery. And the way theyve embraced advanced supply-chain techniques. Ten years ago 100 percent of our customers in China were non-Chinese-domiciled companies. Five years ago it was 80-20 non-Chinese to Chinese. Today better than 50 percent of our customers are Chinese-domiciled companies. In the past 12 months, 60 percent of our new leases have been to Chinese-domiciled companies. They didnt see the need or the requirement to have modern, efficient logistics space ten years ago. Today the better companies all see it. Whats different about operating in Japan? Japans very different from China, but its a very profitable and very efficient business. In Japan we have over $9 billion in assets, and we run it with 70 people. Ninety-two percent of our assets are in Tokyo and Osaka, where you have positive population growth, positive GDP growth. There are two Japans today: Tokyo and Osaka are doing well, the rest of Japan not as well. All of our assets are in the part of Japan thats doing very well. Since we started the business in Japan in 2002, weve averaged 99.5 percent occupancy. Our development margins there are very strong. Return on equity is very strong. Its a great business. How do you grow there? We have a development joint venture with Canada Pension Plan thats doing very well, with a total capacity of $1.5 billion, and we expect it to deploy over three years. Were well ahead of schedule on that. Why team up with a pension fund? Is that because of the cost, or capital efficiency? Its a fund management strategy where we put up 50 percent of the equity and they put up 50 percent of the equity. We get asset management fees. We get leasing property fees. And we get an incentive return. So they end up with very good returns, and we end up with superior returns than if we just invested 100 percent of the equity. Is this a one-off or a model for future developments in Japan and elsewhere? It will be a model for future developments in Japan. Canada Pension Plan is a great partner and somebody we really enjoy working with. Its a good way to leverage our equity with great institutional equity, and it keeps us from going back to the capital markets and issuing equity to grow. Youre doing the same thing with CIC? Right. We built a large business on the private equity side in the past, prior to Global Logistic Properties. Weve got great relationships with some of the best investors in the world: GIC, CIC, CPP. Its a great way to build the business with smart, informed investors and a way to leverage your equity with great capital. This is the first joint venture we have with CIC, and we wanted to make sure the first partnership was something that theyd make money on and get the returns they expected. You only get one chance to make a first impression. Great growth, but all in Asia. Where do you go next? Were in the fortunate position where we dont need to do anything else. Were No. 1 in a country of 1.3 billion people that has a dramatic shortage of space in our industry. That means that well continue to grow. So anything we do, it has to be compelling. It has to be something that we think makes sense, that we can grow and grow profitably. Whats the biggest concern you have for the next couple of years?
I worry about the macro economy. I worry about Europe. I worry about the Middle East. I worry about a lot of things I cant control. But what I can control is making sure that we have the strongest balance sheet in the industry, which we do. Weve got a strong cash position, low leverage, plenty of availability of capital. Thats all you can do to guard against outside threats to the business.